Is college worth the money?

Wednesday

May 28, 2014 at 6:00 AM

By Peter S. Cohan WALL & MAIN

College is an expensive investment for students and/or their parents. But for Worcester's 32,000 higher education students, the question is not so much whether to make the investment but how each of them will make the investment pay off.

The cost of four years of college — as I know from paying two tuitions — can be well more than $50,000 a year. And education is an investment that I would probably make even if it cost $100,000 a year — which at current rates of tuition inflation it will surely reach.

My rationale for this view is not purely rational. It's really something that is deeply ingrained in my value system — resulting from my own education and the tremendous emphasis that my parents and grandparents placed on getting the best possible education.

Given that as a human being I am subject to confirmation bias — the tendency of decision-makers to latch onto information that reinforces their already established beliefs — it should come as no surprise that I am interested in data showing that my willingness to invest in education is rational.

Two pieces of data reinforce my belief — the idea that higher education offers cash returns in current dollars that exceed tuition by $500,000 and the idea that the income of those with college education compared to those with high-school only schooling is exceeding the latter by a rapidly growing amount.

As for the latter conclusion, it is getting more and more economically beneficial to go to college. According to the New York Times, "Analysis of Labor Department statistics by the Economic Policy Institute in Washington [concludes that] Americans with four-year college degrees made 98 percent more an hour on average in 2013 than people without a degree. That's up from 89 percent five years earlier, 85 percent a decade earlier and 64 percent in the early 1980s."

Unfortunately, into every sunny set of statistics some rain must fall. And one of the biggest of those rain drops is the notion that wages for everyone have been essentially flat since 2002. The Economic Policy Institute found that the average hourly wage for college graduates has risen only 1 percent over the last decade, to about $32.60. And the gap in pay between the college graduates and everyone else is growing because the high-school grads' pay is falling fast — at a 5 percent rate to about $16.50.

This means that even though official statistics show that inflation has remained under 2 percent for the last decade or more, actual living expenses for things like food, gasoline (when was the last time you paid $1.99 for a gallon of gas?), and rent have risen much faster — thus putting the squeeze on the average wage earner.

The problem with the comparative wage analysis is that it leaves out the investment of college.

For college proponents, the great news is that the total value of the investment in college has about doubled in the last 30 years. That's according to a paper published May 22 in Science by MIT's David Autor which reveals that the true cost of a college degree is about negative $500,000 — or put more clearly, the recipient of a college degree gets $500,000 more in adjusted earnings than someone who does not go to college. To get to that conclusion, Mr. Autor first subtracts off the upfront cost of tuition and fees. Then he adds the value in current dollars adjusted for inflation of the difference in lifetime earnings between college graduates and high school graduates. In 1984, that figure was about negative $250,000.

One little problem with this analysis is that it does not reflect the big differences in lifetime income across different majors. If you get a degree in engineering or science, you will likely make more than if you major in Philosophy. According to PayScale, a mid-career Petroleum Engineering major hauls in $160,000 a year — more than four times what a mid-career Child & Family Studies major makes.

It is impossible to leave this discussion without bringing up two other points. First, there is more to life than making the largest possible amount of money. I happen to believe that there is tremendous value in working in a field about which you are passionate and where the beneficiaries of your efforts perceive that you are helping them in meaningful ways.

Second, I struggle to understand why our society puts a higher economic value on hedge fund managers than any other field. The biggest of these titans of finance haul in billions of dollars a year personally — yet on average they manage other peoples' money very poorly. For example, the average hedge fund — with a 7.4 percent return — lagged the market average S&P 500 index, which was up 32.4 percent, for the fifth year in a row in 2013.

All these top hedge fund managers made it through college and plenty of them have PhDs in math and physics.

But the statistics suggest that the average return on investment in education vastly exceeds what you can expect if you put your money in a hedge fund.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.